Rayonier (ticker: RYAM) is the world's largest producer of specialty cellulose, which is used to make numerous products, including liquid-crystal-display screens, cigarette filters, paint, pharmaceuticals, and thickeners for food, to name a few. The company was spun out of
RayonierRYN 0.5695977216091136%Rayonier Inc.U.S.: NYSEUSD28.25
0.160.5695977216091136%
/Date(1481234521598-0600)/
Volume (Delayed 15m)
:
356035AFTER HOURSUSD28.25
%
Volume (Delayed 15m)
:
5783
P/E Ratio
20.0354609929078Market Cap
3451642992.4588
Dividend Yield
3.5398230088495577% Rev. per Employee
2243300More quote details and news »RYNinYour ValueYour ChangeShort position
(RYN), a timber real-estate investment trust, on June 27, after being intertwined with that company for much of its 88-year history.

AS THE LEADER IN a highly concentrated industry with high barriers to entry—just three companies control almost 70% of the global cellulose specialties market—Rayonier is a first-class business. As demand climbs for cellulose specialties around the world, the company will be a prime beneficiary. The market is expected to log 3% annual growth.

Top management appears to like the prospects. Last month, CEO Paul Boynton resigned from the top job at Rayonier timber to take the helm of the spinoff.

Rayonier's shares have popped 15% since they were issued, but still look attractive at a recent $41.50. In the next few years, there could be plenty of upside.

Steven Chercover, an analyst at D.A. Davidson, thinks the shares could gain 30% in the next 12 to 18 months.

From its beginnings in the 1930s, Rayonier bought up timberland as a source of pulp, a key ingredient for cellulose. With the corporate split complete, the parent Rayonier owns the land, and Rayonier Advanced Materials walks away with the manufacturing and 30% of the cellulose market. Its two major competitors are
TembecTMB.t 3.4316869788325848%Tembec Inc.U.S.: OTCUSD1.29
0.04283.4316869788325848%
/Date(1481239209000-0600)/
Volume (Delayed 15m)
:
11549
P/E Ratio
8.675184936112979Market Cap
130620259.532986
Dividend Yield
N/ARev. per Employee
348046More quote details and news »TMB.tinYour ValueYour ChangeShort position
(TMB.Canada) and Buckeye Technologies, a unit of Georgia-Pacific.

Chercover estimates that Rayonier will earn $121 million, or $2.87 a share, this year, on revenue of $1 billion. In 2015, he sees earnings of $3.27, driven by higher demand for specialty cellulose.

Despite the strong outlook, Rayonier's markets have come under pressure on the supply side. For years, supplies were tight and prices rose. But last year, Rayonier expanded capacity by 190,000 tons, and Buckeye followed suit, adding 45,000 tons. Pricing fell 3% in the March quarter, and could drop 7.5% for the entire year. That's weighing on profit, which hit $4.13 a share last year.

IT MIGHT NOT GET much worse, however, because Rayonier controls the bulk of the extra capacity and can bring it on line gradually. On a June 11 analyst call, CEO Boynton said the company "is going to be feathering" in the excess capacity "as the demand is ready and available for it," and that the "bias is to maintain price."

Chercover, the D.A. Davidson analyst, thinks that pricing will hold steady in 2015, and that specialty-product volume will grow. He forecasts sales of 530,000 metric tons of cellulose specialties this year, rising 6% in 2015. Sales of commodity products could total about 150,000 tons this year.

In time, management could shift all of its production to higher-margin specialties, without having any commodity-based volume. That would boost earnings before interest, taxes, depreciation, and amortization from an estimated $302 million this year to $500 million.

Chercover values Rayonier Advanced Materials' shares at $53, based on an enterprise value of eight times normalized Ebitda of $400 million.